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INVESTING

DAVID RIEDEL — EMERGING VALUE

FROM MAO SUITS TO MICHAEL KORS
^ ^ ^ "^HT" ^ ^ h e n I first trav^^ ^ ^ / eled there in % / % / 1987 the streets M / ^Li were filled with w w bicycles, travel restrictions were severe, drab-colored Mao suits were ubiquitous and luxuries were nonexistent. Twentyfive years later China's economy is 40 times larger, unimaginable wealth has been created, and with it has come a seemingly insatiable appetite for luxury goods and brands. Chinese consumers now account for a third of global sales for Italian high-fashion brands Prada and Cucci. Total annual spending on luxury goods by Chinese consumers is nearly $49.3 billion. Bain & Co. estimates show, compared with the $60.4 billion shelled out by Americans. Do you really think Paris or Milan dictates the latest fashion trends? China is driving growth at the largest luxury brands. If the Chinese consumer is demanding certain colors, cuts and styles, we will see more of those on runways and in collections worldwide. Nowhere is China's heavy influence more apparent than in the market for jewelry. From 2010 to 2015 demand for jewelry is expected to grow by 52% in China and 44% in India. To meet that demand, diamond production is expected to grow 40% f'rom 2010 to 2020. Look at PETRA D I A M O N D S (PDLL, 102), which Operates eight diamond mines. It's known particularly for its colored gems, including a shade called bubble-gum pink. Petra shares have a price/earnings ratio of 17.4, and its enterprise value to cash flow multiple is less
DAVID RIEDEL 1

t h a n t w o . GEM DIAMONDS (GEMD.L, 194.70)

is much smaller but produces half of the world's yellow diamonds.
Jewelry chain CHOW TAI FOOK (1929.

H K , 9.60) is currently trading at a P/E of 13.8 and has maintained cash flow growth of more than 26%. The company has more than 1,600 Hong Kong retail outlets and a strong presence in 320 cities on the mainland. High-end fashion apparel and accessories are also fertile ground for investors. In fact, PRADA spA 09i3.

about brands, prices and quality. Forget the commonly held belief that the Chinese love counterfeit goods. This is a big change from just a few years ago when people would buy just about anything with a certain logo on it. My research firm specializes in "man on the street" interviews. One striking ohservation we recently made was a sharp drop in aspiration for foreign brands versus domestic brands in certain categories. Chinese consumers increasingly want to buy local, especially when it comes to sportswear and cellular handsets. These manufacturers tend to be more nimble in adapting to local tastes at appropriate price points. Local brands like Nike-knockoff sportswearmaker LI NING (2331.HK, 4.37) are taking market share. Li Ning was founded by a former Chinese gymnast who won six medals at the 1984 Olympic Games in Los Angeles. The company, named afrer its founder, has about 8,300 retail stores and is one of

CHINESE CONSUMERS' TASTE FOR LUXURY NOW EXTENDS TO LOCAL BRANDS, TOO
HK, 57.20) and French toiletries maker
L'OCCITANE INTERNATIONAL SA (0973.HK, 18.72)

went so far as to list their stocks in China. MICHAEL KORS (KORS, 5O), which trades on the NYSE, is another red-hot favorite among Chinese. It recently opened its fifrh, and largest, store in China and expects to open 15 more by the end of the year. There are some important things to keep in mind when investing in Chinese luxury stocks. First, the Chinese are well-informed

the best-known brands in China. Its stock trades at a P/E of 14.9 and five times cash now. Other local brands to watch are Kweichow Moutai and privately held fashion and bridal gown maker Ne-Tiger. Investors would be wise to tap into Chinese demand for luxury. Most brokers can help you buy Hong Kongtraded shares. But keep an eye on local competition. The Chinese have a saying: "If a string has one end, then it has another end." O
'S. HE IS ALSO THE

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I FORBES SEPTEMBER 10.2012

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